* Shareholders overwhelmingly back $1 bln share buyback
* Royalty Pharma may sweeten offer ahead of May deadline
DUBLIN, April 12 (Reuters) - Irish drugmaker Elan won strong approval from shareholders for a $1 billion share buyback as it seeks to keep them on side and stave off a takeover approach from U.S. investment firm Royalty Pharma .
The buyback, priced between $11.25 and $13.00 per share, was supported by 99.2 percent of shareholders on Friday. The company was returning cash to investors after the $3.2 billion sale of its interest in multiple sclerosis drug Tysabri.
Royalty may sweeten its $11 per share proposal by paying more via a contingent value right (CVR) if Tysabri, which Elan still receives royalties for, hits certain sales milestones, two people familiar with the matter told Reuters.
Elan's shares are trading at $12 in New York. If Royalty does come up with more, Elan investors will have to decide whether to take the money or trust Elan to make better use of cash through a series of smart acquisitions.
"If they get to $12, the choice for investors is have you got faith that management can do value-enhancing transactions, do you buy into that story or do you just want cash out now," said Deutsche Bank analyst Richard Parkes.
"Does that change if you've got $12 and maybe this contingent right? I don't think it necessarily changes things that much but it might just get them across the line to get the shareholder support they need to galvanise."
Elan has rejected Royalty Pharma's proposal, calling it a "highly conditional indication of interest", and hopes instead to reinvent itself in a series of acquisitions after the Tysabri deal left it with just one experimental drug in its pipeline.
An Irish takeover panel has given Royalty Pharma until May 10 to make a firm offer or walk away.
CVRs have been used in the past in drug and biotech deals to bridge differences between buyers and sellers, reflecting the uncertainties surrounding sales of new medicines.
In 2011, French drugmaker Sanofi struck a deal to buy Genzyme with a sweetened $20.1 billion cash offer plus a CVR tied to the success of the U.S. biotech group's drugs. The Nasdaq-traded Genzyme CVR was worth up to $14, although it is currently trading at less than $2.
In an added twist, Elan shareholders also have to consider the value of a "unique cash dividend" promised by Elan last month that is tied to the royalties it will receive on Tysabri.
Under the deal it struck with Biogen Idec on Tysabri, Elan's royalty payments will be 12 percent of sales in the first year, 18 percent after that, and 25 percent when annual sales rise above $2 billion. One fifth of the royalty stream will be paid out to investors under the dividend plan.
Tysabri sales rose 8 percent to $1.63 billion in 2012.
Dublin-based Elan, whose shares were little changed in European dealings, will announce the final price of the share buyback offer next Thursday.
The buyback represents almost 15 percent of Elan's existing issued share capital.